Law & Retail Real Estate

WHAT ARE SOME OF THE MAJOR LEGAL ISSUES facing retail real estate owners, developers, managers, lessors and/or lessees in today's marketplace? When do you need a lawyer? And are there advantages in utilizing in-house counsel as opposed to retaining independent attorneys? To get the answers to these and other questions, Shopping Center World spoke with members of a number of leading law firms active in the retail real estate arena, with the resulting comments and insights presented below.

The role of legal counsel Players in the retail real estate game have always needed legal counsel, but the type and scope of advice they need is constantly evolving, according to Harold B. Pomerantz, partner and chair of the Real Estate Practice Group of Piper Marbury Rudnick & Wolfe, a national firm whose retail practice represents developers, national retailers and franchisers, commercial lenders, equity participants and REITs.

"In the past, we would advise our clients on a specific project or development, assist in the zoning, acquisition and financing, development and construction, environmental work, and ultimately assist in the leasing of the project," says Pomerantz, speaking from his office in Chicago. "But today, we are more integrally involved in all aspects of our clients' business strategy on a portfolio-wide basis.

"We now provide services that range from the traditional site-specific work mentioned above," Pomerantz continues, "to issues of securitization and the public ownership of real estate, complex financing issues, tax increment financing or other avenues of governmental incentives or assistance, and joint ventures with equity sources."

"The role and function of legal counsel has evolved in the past few years into more of a business counseling role, going beyond the traditional legal-advisor role," says Janis B. Schiff, partner with Holland & Knight LLP, a national firm that offers legal services to retail developers, landlords and tenants in connection with projects including regional malls, urban retail, neighborhood shopping centers and retail-distribution center projects.

More business counsel Speaking from her office in Washington, D.C., Schiff notes that legal counsel is more involved in the strategy behind business decisions in the world of retail real estate, a situation she attributes to the complex nature of transactions and the integration of business/legal issues.

"For example, if a landlord and a tenant are negotiating a lease provision relating to the tenant's right to be the exclusive occupant of a project to sell books, the attorneys are involved in drafting and negotiating all of the permutations of this concept," says Schiff. "These attorneys need to understand the nature of the tenant's business, as well as the landlord's ability to grant such a right, and the legal and business implications for the rest of the project, its financing and other factors."

"The growing complexity of the retail environment has transformed the role of outside transactional counsel, requiring increased specialization and expertise in many ways," says Alfred G. Adams, Jr., partner with Sutherland Asbill & Brennan LLP, a national law firm with headquarters in Atlanta and Washington, D.C., that provides legal services to individuals and businesses engaged in retailing, retail real estate development, financing, leasing and management.

Trend toward specialization "As the retail industry has matured, all parties involved have become much more sophisticated," notes James B. Jordan, chair of Sutherland Asbill & Brennan's Retail Group, speaking from his Atlanta office. "Given this reality, it has become increasingly difficult for general real estate lawyers who do not specialize in retail matters - no matter how good they are - to effectively represent the interest of retail clients."

The successful and efficient negotiation of a typical retail transaction involves lease issues such as opening and operating covenants, "go dark" clauses, exclusive use rights, assignments and subleases, as well as the complexities inherent in reciprocal easement and development agreements. "This mandates that all of the lawyers involved have substantial expertise as to the legal and business issues inherent in the transaction," Jordan explains.

The need for speed Today's fast-paced business environment makes specialization even more important for lawyers and their clients.

As Adams adds, "Technological advances have substantially enhanced our operating efficiency, along with the efficiency with which we can communicate with our clients and other parties to a retail transaction." One impact of this trend, which Adams notes is not confined to the realm of retail real estate, is increased client expectations concerning response time.

"No longer do we have the luxury of carefully drafting multiple versions of a document and performing hours of legal research before we turn out our work product," he says. "We now are faced with the need to turn out drafts of documents on an almost instantaneous basis." This serves to further increase the need for sophistication and specialization on the part of lawyers, he says, noting, "While a skilled and experienced retail attorney can perform well under intense time constraints, a generalist often encounters difficulties."

When do you need a lawyer? Today's complicated retail real estate world mandates the use of lawyers in a variety of instances. "Virtually every aspect of retail real estate ownership and development calls for the use of legal counsel," says Fredric L. Carsley, partner with Mendelsohn Rosentzveig Shacter. Based in Montreal, Quebec, Canada, the firm offers services to retailers, retail developers, owners and managers in the areas of acquisitions, development, leasing, operations/management, financing and participations, including joint ventures, partnerships, limited partnerships and co-ownership arrangements.

"Legal counsel is necessary for everything from acquisition and development of raw land - including zoning, services, negotiations with local authorities and so forth - to the negotiation of the lease agreements that have become increasingly sophisticated, to title, financing and other issues," he says. "Commercial real estate is a business that relies heavily on legal counsel, from planning to execution to enforcement."

"Legal counsel should be involved with just about every aspect of retail real estate ownership and development, starting with zoning and land-use analysis," says Pomerantz. Legal counsel also needs to be a part of processes that include the following: acquisition and financing, negotiating public-private partnership arrangements which provide alternative sources of financing, preparation and negotiation of construction documentation, and preparation and negotiation of the constituent occupancy agreements - whether these be leases, reciprocal easement agreements, or outparcel sales with highly negotiated deed restrictions. "Effective legal counsel is indispensable in any retail leasing transaction, other than perhaps a small-shop lease in which the tenant is willing to sign the landlord's standard form lease with little or no changes," says Jordan. "And even here, the tenant would be well advised to call upon legal counsel to review the lease and advise the tenant as to its provisions."

Legal counsel is also essential for both buyers and sellers of existing retail centers, according to Jordan. "On the buyer's side, legal counsel should not only be involved in the negotiation and documentation of the acquisition agreement and any contemporaneous financing documentation, but also should play a key role in the extensive due-diligence process required in acquiring a retail property.

"The due-diligence process covers, among other things, a review of major leases and analysis of exclusive-use provisions, renewal options and CAM provisions," he continues, "as well as underlying reciprocal easement agreements and other title, zoning and environmental issues."

"It is also important to seek legal counsel in analyzing management and brokerage agreements to review such issues as compensation, indemnities, termination, rights after termination, standard of care and other issues which define the relationship between real estate owners and managers," he adds.

In-house vs. going outside Do you maintain your own in-house legal team? Or do you outsource this function? Most companies involved in retail real estate do both, according to Schiff.

"The benefits of in-house counsel are that they know the way the company likes to operate, they have immediate access to all persons involved in the process, such as development, operations, construction, leasing, etc., and the cost tends to be lower," says Schiff.

She also notes, "With outside counsel, you can get more varied experience in areas where in-house counsel may not have time or interest in concentrating, such as in the areas of bankruptcy, environmental and litigation."

In-house and outside counsel need to work as a team, says Pomerantz. "Our favored course of action is always to work in conjunction with in-house counsel. A true partnering relationship with our clients' in-house legal staff better enables our attorneys to understand our clients' goals on a particular transaction, as well as the overall business mission, core objectives and strategies."

However, Pomerantz says, "Full-service real estate practices are able to offer a client experience and depth in a variety of disciplines. The breadth and depth of a full-service real estate practice can assist an in-house legal department which either doesn't have sufficient staff or a particular area of expertise."

When it comes to the realm of costs, Adams relates the following: "Depending on the circumstances, either in-house or outside counsel can be more cost-effective. If a client has a number of recurring, similar transactions, the volume of which is relatively predictable, it may be more cost-effective to employ in-house legal staff to handle the bulk of all legal needs.

"On the other hand," he continues, "if the amount of the client's legal transactions varies significantly in volume, scope or complexity from time to time, or if the number of transactions often come somewhat simultaneously, punctuated by periods during which there is relatively little activity, it may be more cost-effective for the client to hire experienced outside counsel as needed, rather than bear the continuing expenses associated with maintaining a significant in-house legal staff."

Today's legal issues A number of issues currently occupy the time and talent of retail real estate companies, retailers and their lawyers. According to Schiff, "The major legal issues include bankruptcy, lender issues, competition and its impact on development, Internet and other technological developments, and the avoidance of litigation costs and time."

One major legal issue facing both retail developers and retailers is the growing difficulty in locating sites that have the full complement of required entitlements and approvals. As Adams says, "This is particularly a problem in the heavily populated areas of the country that are so attractive to developers and retailers - and where more and more communities are adopting zoning and land-use laws that make it difficult to develop retail properties due to concerns over increased urban sprawl."

In many markets, he notes, "These concerns have resulted in the creation of significant obstacles to the development of new retail projects, the most stark example being the moratoria on big-box development recently adopted in a number of jurisdictions."

This problem is particularly challenging to the transactional counsel who practices in many jurisdictions and does not have the expertise or experience to resolve specific zoning and land-use problems that arise in each locality.

"Successful resolution requires close collaboration between transactional counsel and the zoning and land-use counsel practicing in the subject locality," Adams says, "with the transactional counsel acting as a generalist who understands the transaction as a whole, and directs or oversees land-use counsel to ensure that client objectives are realized."

In today's retail environment, the rise of e-commerce has made legal life more complicated than in the days when brick-and-mortar shopping centers were the only game in town. "Obviously, the issue of returns of Internet purchases to brick-and-mortar stores is getting a great deal of attention," says Pomerantz.

"From a legal perspective," he adds, "traditional retail and shopping center documentation may become outdated in several key areas. Restrictive-use clauses in long-term retail leases may very well limit a retailer's ability to react to a fast-changing retail climate by changing its merchandise mix, while also preventing a multi-concept retailer from replacing an under-performing concept with another in its corporate group that has a better chance to enhance sales."

How do you go about picking the right law firm to meet your legal needs? There are a number of factors that need to be considered, according to members of the firms featured in this section.

"I would, first and foremost, look for a firm with a strong retail development and leasing group - a firm with several partners and associates who have a track record representing both landlords and tenants in the type of retail project you intend to develop, occupy or own."

"Look closely for signs of knowledge of how the retail industry works," she says, as well as for experience in "doing deals," preferably on a multi-state and multi-regional basis.

In a very basic sense, find a firm with personnel you feel comfortable working with. "You need to feel that you can, and will, enjoy working with the attorneys who will be representing you," Schiff notes. And at the same time, make sure your legal counsel understands the value of interpersonal relationships in hammering out agreements among competing parties. "Much of the success in the negotiation process is relationship-driven."

Sound advice, according to Sutherland Asbill & Brennan's Al Adams. "Select lawyers who will represent you effectively and aggressively, but in a courteous and professional manner that will leave the other party to the transaction with a favorable impression," he says. "Remember that your lawyer is viewed as your representative in many respects, and that discourteous or unnecessarily strident conduct by lawyers can result in loss of repeat business for you."

The implication for retail owners, developers and managers is clear, he says. In short, "You need to hire lawyers who are aware that your tenants are not your opponents - they are your customers."

Select lawyers with whom you can establish good personal chemistry and rapport, according to Adams' colleague, James Jordan. "Make sure they have demonstrated expertise in the type of legal issues which arise regularly in your business."

When checking out a legal firm, it pays to determine if it has extensive experience in the retail industry, and whether the expertise of its attorneys is widely recognized among retail owners, tenants and lenders, as well as their counsel. The major question to be answered is: "Will this firm bring credibility to your position in deals?" advises Jordan. "Ask for several references, and then follow up."

In addition, make sure you select lawyers who demonstrate sensitivity to the time demands of your business. As Jordan adds, "It is important that they be committed to operating on your schedule - not theirs. Good lawyers know that time kills deals."

Overall, "Select attorneys who have a reputation for outstanding ability and integrity, and check their references on this point," cautions Adams. "Be wary of lawyers who talk a lot about themselves and their accomplishments at the initial interview and, at the same time, ask few questions about your expectations and business objectives."

"If I was selecting a law firm to represent me in the Province of Quebec," says Mendelsohn Rosentzveig Shacter's Fredric Carsley, "the attributes I would be looking for would be fluency in both English and French, a broad-based experience gleaned from representing different players in the industry, and a legal expertise that is applied pragmatically as opposed to dogmatically, with a business approach in mind."

Another essential ingredient for Carsley is a solid grounding in taxation on a federal, provincial and cross-boarder basis, as well as an understanding of the sales tax, evaluated tax system and related taxation matters.

There are some drawbacks to representing different types of retail industry players. "There are some national retailers who, for corporate policy reasons, shy away from qualified attorneys simply because they represent developers, just as there are some major retailers who will not allow their outside counsel to represent their competitors," Carsley says.

Nevertheless, he adds, "Many chain retailers and smaller developers appreciate the connections and goodwill that a 'name attorney' has developed within the industry over time, as well as that person's ability to facilitate negotiations and problem-solving."